Bids should pay for the bank guarantees they consume

Ask an Indian engineering company what limits its growth and the answer is usually orders, people or plant. In my experience the honest answer, for a mid-sized contractor in a good year, is often a figure in a sanction letter from its banks: the non-fund-based limit against which those banks issue the guarantees every project requires. When that limit is full, the company cannot bid, however strong its pipeline. Yet in most budgets I have read, including Ilvara's before 2021, the limit appears as a facility rather than as capital, and bids are approved as though bank guarantees cost nothing beyond their commission.

The limit that sets the order book

A typical contract for process equipment or an industrial plant package asks for several instruments. Advance-payment guarantees cover the money the client pays at award and fall away as equipment is delivered. Performance guarantees, often around 10 per cent of contract value, run until the client accepts the plant and through the defect-liability period that follows. Some clients also release retention money only against further guarantees. A ₹500 crore order can therefore occupy ₹100 crore or more of limits at its peak and keep half of that occupied for three or four years after the last invoice.

Banks sanction those limits against the company's balance sheet, its credit rating and, in many promoter-led groups, collateral and personal sureties from the promoter family. The limits are therefore not free. They draw on the company's borrowing capacity, they appear in rating analysis as contingent liabilities, and when they run short the usual remedy is to pledge more of the promoter's assets. That ties the family's wealth to the company's contract risk in a way minority shareholders rarely see.

In April 2021 Ilvara had used 92 per cent of ₹1,900 crore of limits from eight consortium banks, with about ₹2,100 crore of bids in preparation. Our executive chairman offered to raise ₹800 crore more by pledging promoter-group land and extending his personal surety. It was generous, and it was the fastest answer. I argued against it because it would have taught the company that bank capacity could always be found, and that lesson had filled the lines in the first place.

Recovering what the banks still count

The first discovery was that a large part of our limits was supporting nothing. When we reviewed every outstanding instrument, ₹340 crore related to contracts whose obligations had ended. The defect-liability periods were over, but clients had not returned the originals, and a bank continues to count an instrument until it is returned or its claim period lapses. Some clients had simply filed them away; a few kept them as a bargaining chip in unrelated disputes. Nobody at Ilvara was responsible for getting them back, because the commercial team had moved on to the next order and finance saw the instruments only as a total.

We set up a team of four to recover them. They wrote to each client with the contract clause and the acceptance certificate, followed up in person and, where courtesy failed, issued formal notices. The work was unglamorous and it succeeded: within fourteen months, ₹290 crore of instruments had come back. We also asked clients whose contracts allowed it to halve performance guarantees after successful performance tests, which released another ₹120 crore. And we withdrew from three bids worth ₹760 crore that would have consumed heavy bank capacity for thin margins.

The cost was real. Order intake fell 9 per cent in 2021–22, and our sales team watched competitors take work we had chosen to let go. But utilisation fell to 68 per cent by mid-2022, the rating agency upgraded us from BBB+ to A- that September and to A in November 2024, and the commission we pay has fallen from about 1.4 per cent a year to 0.9 per cent. In 2024 our lenders released the chairman's personal surety on our term loans. In 2025 they raised our limits to ₹2,600 crore without new promoter collateral.

Charging each bid for the limits it uses

Recovering stale instruments is a one-off gain. The lasting change is in how bids are approved. Every bid paper at Ilvara now carries a forecast of the bank instruments the contract will need, by type, amount and duration, and the bid committee sees two charges against its margin. The first is the commission, which is visible and modest. The second is an opportunity charge: a share of our cost of capital on the limits the bid will occupy, reflecting the bids we will be unable to make while they are in use. A contract that ties up ₹80 crore of limits for five years has to earn more than one that ties up the same amount for eighteen months.

The charge changes behaviour in useful ways. Our sales teams now negotiate bank requirements as hard as price, asking for reductions after performance tests and for advances secured against delivered equipment. Some public clients now accept insurance surety bonds in place of bank guarantees, a newer instrument in India, and where they do we compare its cost and conditions with our bank lines rather than assuming either is cheaper. We also decline more work. A thin-margin order that occupies a large share of our limits for years is often a poorer use of them than two smaller orders with shorter obligations.

There is a counter-argument, and I hear it at nearly every bid committee. Market share in engineering is sticky: a refinery that buys from a competitor this year may stay with that competitor for a decade, and declining work for want of limits can cost more than the limits themselves. I accept that the charge is a judgement, and the committee can and does override it for strategic clients. Its purpose is not to forbid such decisions but to make them visible, so that a director can see that a particular order is strategic precisely because it uses capacity the company could otherwise have sold.

For directors of project companies, I would suggest three questions. How much of the non-fund-based limit is supporting contracts whose obligations have ended? What share of current utilisation rests on promoter collateral or personal sureties, and has the board agreed to that dependence? And does every bid paper show the limits the order will consume and for how long? A board that can answer those three is managing a scarce resource. One that cannot is running its growth on a facility it has never priced.